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Section 125 plans and corporate mergers


Belgarath
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I'm not finding anything in the cafeteria plan proposed regs that deals with this. So, let's say you have two non-profit corporations, only one of whom sponsors a cafeteria plan. The two corporations "merge" to form a new corporation, with a new employer id #. They do this mid-year.

In the qualified plan world, there is certain guidance for merger and acquisition situations, but I haven't seen anything on this for cafeteria plans. Anyone have any experience with this, or know of any guidance? If not, opinions on what is normally (or should be) done? Thanks.

Found some small amount of guidance which isn't really on point, but perhaps gives a tiny insight into general thinking by the IRS - seems tilted toward being reasonable - Revenue Ruling 2002-32. Since this is not on point, very old, and prior to the proposed regulations under 125, it ultimately isn't very useful, but is all I've been able to find...

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If you really have a merger of the two nonprofits, the surviving company would inherit the 125 plan, so the employees of the nonprofit that had it would just continue to participate. It seems to me that Rev. Rul. 2002-32 is in fact very on point, because it says that even in an asset sale, where it is harder to get to that conclusion based on the Code and regs, the purchaser can assume the seller's 125 plan (situation 2), and the employees continue to have the same rights and obligations as if there had been no sale. There is no reg on point, but what is described in Rev. Rul. 2002-32, situation 2, is what happens in acquisitions all the time, and frankly was happening even before Rev. Rul. 2002-32. Really, from a tax standpoint all Section 125 does anyway is provide an exception from constructive receipt, and it seems to me that Rev. Rul. 2002-32 is correct that in both hypotheticals the employees are not provided with a new choice between cash and benefits.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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